As a cost-conscious, highly competitive electronic commerce environment comes of age, businesses are looking at electronic data interchange (EDI) in a new light. EDI is defined as the inter-process communication (computer application to computer application) of business information in a standardized electronic form. In short, EDI communicates information for business transactions between the computer systems of companies, government organizations, small businesses, and banks.

Using EDI, trading partners establish computer-to-computer links that enable them to exchange information electronically. This allows businesses to better cope with a growing avalanche (too many) of paperwork: purchase orders, invoices, confirmation notices, shipping receipts, and other documents. With the aid of EDI, all these documents are in electronic form, which aliases more work automation to occur and even alters the way business is done.

Many industries see EDI as essential for reducing cycle and order fulfillment times. Manufacturers work with customers and suppliers to convert to an electronic exchange the huge volume of orders and records that now crawl back and forth on paper. In retailing, EDI can provide vendors with a snapshot of what stores are selling, enabling them to recognize and meet their customer's needs much faster than in the past. In addition, it enables retailers and vendors to place orders and pay bills electronically, reducing time and the expense of paperwork.

The primary benefit of EDI to business is a considerable reduction in transaction costs, by improving the speed and efficiency of filling orders. Studies show that it takes up to five times as long to process a purchase order manually as it does electronically.

Ironically, despite these advantages, EDI is not (yet) widely used. It is estimated that out of millions of businesses in the United States, only 44,000 companies exchange business data electronically. Only about 10 percent of these companies use EDI for financial transactions. Moreover, no more than fifty banks have the capability of providing complete financial EDI services to their corporate customers. The joke in industry is that most companies are so unfamiliar with EDI they don't even know how to spell it.

Defining EDI

Because of the different approaches in the development and implementation of EDI, there is no one consensus on a definition of EDI. A review of some of the prevailing definitions follows:

Electronic data interchange is the transmission, in a standard syntax, of unambiguous information of business between computers of independent organizations. [The Accredited Standards Committee for EDI of the American National Standards Institute)

Electronic data interchange is the interchange of standard formatted data between computer application systems of trading partners with minimal manual intervention. [UN/EDIFACT Training Guide]

Electronic data interchange is the electronic transfer, from computer to computer, of commercial and administrative data using an agreed standard to structure an EDI message. [Article 2.1, of the European Model EDI agreement]

Components of EDI

Electronic Data Interchange (EDI) has three major components. They are:-

  • Trading partners
  • Translation software
  • Communications

Trading Partners

These are business organizations that agree to exchange business information, data and documents via EDI. Small, medium and large organizations that are involved in various types of business activities are part of this group. For partners that dare to trade options that are now being made available are endless.

Translation Software

This software written in some of the most popular platforms regulates most of the operations. Some of its main features include,

  1. It is dual purpose software and it converts files to or from an EDI format called a ‘document’
  2. A document is known as an EDI message and the definition specifies the content and sequence of the data to be included
  3. In the case of outbound business information, data or documents (we will refer to as document), an internal application file format is translated into an EDI format
  4. For inbound documents, the EDI format is translated into an EDI format
  5. For inbound documents, the EDI format is retranslated into an internal application file format
  6. It is not necessary for trading partners to use the same translation software, nor is it necessary for them to have similar hardware platforms
  7. Software and hardware independence is one of the major advantages of EDI


The transmission and reception of ‘document’ between trading partners using compatible hardware and software, which best suits their requirements.